IAI Actuarial Core Principles · Business Management

Strategy, competitive advantage, strategic decision process and PEST analysis: formula sheet

Full chapter guide

Key formulas

Three levels of strategy: Corporate (which businesses?) → Business (how to compete?) → Functional (how to support?); Top-down fit: each lower level must support the one above it.
Core strategic questions: Where are we now? → Where do we want to be? → How do we get there?; A simple frame for defining strategy in any answer.
Porter's generic strategy grid: Cost leadership = lower cost + broad scope; Differentiation = uniqueness + broad scope; Cost focus = lower cost + narrow scope; Differentiation focus = uniqueness + narrow scope; Two questions place any firm: how does it win (cost or uniqueness) and where (broad or narrow market).
Margin in the value chain: Margin = Total value created − Total cost of value activities; Advantage arises by cutting activity costs or raising the value customers see.
Primary activities (adapted to insurance): Product design → Underwriting → Sales and distribution → Policy administration → Claims and service; The standard Porter list is inbound logistics, operations, outbound logistics, marketing and sales, service. Map it to the firm in the question.
Support activities: Infrastructure, Human resource management, Technology development, Procurement; These support all primary activities and are often the source of cost or differentiation advantage.
Sustainability test: Advantage lasts if it is valuable, rare, hard to imitate and exploited by the organisation; This is a general test of durability. Use it to judge whether an advantage will last.
Stages of the strategic decision process: Objectives → Analysis (external and internal) → Options → Evaluation → Choice → Implementation → Monitoring and control → feedback; Learn the order. Exact wording may vary, but monitoring always feeds back to earlier stages.
Three tests for strategic options: Suitability + Feasibility + Acceptability; An option should be tested against all three. Failing one is a reason to reject or modify it.
Suitability: Does the option fit the objectives, the environment and the firm's strengths?; Links to external analysis (PEST, five forces) and internal strengths and weaknesses.
Feasibility: Does the firm have the finance, people, skills, systems and time?; Think of resources and capabilities, including capital and regulatory solvency for insurers.
Acceptability: Will stakeholders accept the expected risk, return and consequences?; Name specific stakeholders and what each cares about.
PEST headings: PEST = Political + Economic + Social + Technological; Macro-environment checklist. Factors are external to the firm and mostly outside its control.
PESTEL headings: PESTEL = PEST + Environmental + Legal; Same idea with two extra headings. Some texts spell it PESTLE or add Ethical.
Prioritising a factor: Priority = Impact on the business × Likelihood of it happening; A ranking idea, not a calculation. Use High, Medium or Low to decide what to act on first.
Link to SWOT: PEST results → Opportunities and Threats in SWOT; PEST covers external factors only. Strengths and weaknesses come from internal analysis.

Quick revision

Strategy is the long-term direction of a firm, set to achieve its goals in a changing environment.
Strategy is set at three levels: corporate, business unit and functional.
Corporate strategy decides which businesses to be in; business strategy decides how to compete in each.
Functional strategy supports business strategy through areas such as finance, marketing and operations.
Competitive advantage means doing something better or cheaper than rivals in a way customers value.
Porter's generic strategies are cost leadership, differentiation and focus.
Focus targets a narrow market segment, using either a cost or a differentiation approach.
Firms that try to do everything with no clear position risk being stuck in the middle.
Strategic decisions follow a logical process: analyse, set goals, generate options, evaluate, choose, implement, review.
PEST stands for Political, Economic, Social and Technological factors.
PEST looks at the external environment that the firm cannot control.
In every answer, tie each point to facts from the case given.

Common mistakes

Mixing up corporate and business strategy. Fix: Corporate asks 'which businesses?'. Business asks 'how do we compete in this one?'.
Treating strategy as a short-term operating plan. Fix: Stress the long-term direction and the choice of scope and resources. Budgets are tools to deliver strategy.
Treating a low price as cost leadership. Fix: Cost leadership means having the lowest cost base. Price is the result. A firm that cuts price without lower costs just loses margin.
Confusing focus with a small firm. Fix: Focus is about choosing a narrow segment. A large insurer can follow a focus strategy in one segment. Always check scope, not size.
Listing the steps with textbook definitions and no link to the case. Fix: Add a case fact to every step, such as the insurer's capital position, the regulator's rules or the target segment.
Mixing up suitability, feasibility and acceptability. Fix: Use one-line tests: fit (suitability), can we do it (feasibility), will others agree (acceptability).
Listing generic factors that are not linked to the business. Fix: Tie every factor to the firm's products, customers or costs. Write 'so this means...' after each one.
Putting internal matters, such as staff skills or the firm's own IT system, under PEST. Fix: PEST covers only external forces. Internal items belong to strengths and weaknesses. Use industry-wide technology change under Technological.

Exam tips

Always name the level before explaining. Markers look for the correct label first.
In case studies, quote the firm's own actions and classify them by level.
Use insurance examples: product launches, distribution channels, pricing and claims systems.
For longer answers, show how the three levels link and mention one possible conflict.
Keep MCQ answers short. Decide by scope: group, unit or department.
Always name the strategy using Porter's terms, then justify it from the facts given in the case. Marks go for linking, not for naming alone.
Check scope before labelling: broad market points to cost leadership or differentiation, narrow segment points to focus.
Use the value chain to give specific, firm-level reasons. Avoid reciting the full list unless asked.